Supply Chain Risk Management – New Year Recommendation – Part Two

confettiMy last blog introduced a 3-part series on predictions and my resulting supply chain recommendations for a fresh start for the year ahead. I started with number one, profitable proximity, a relatively new wave seeing growing popularity amidst the evolving global marketplace. The growth in the global marketplace also often precedes initiatives addressing the second prediction, the growth of supply chain risk management.

Prediction #2: Supply chain risk management will grow.

fireSupply chain risk management continues as a common goal for at least the last five years:

  • 2009 IDC Prediction #9: As global economic pressures mount, outsourcing opportunities proliferate and global supply networks become more complex, risk management becomes both an increasingly significant capability and a key differentiator for the Modern Supply Chain.
  • 2013 Prediction 1 – Resiliency Becomes a Priority for End Users Looking to Master ‘Massive Multidimensionality’
  • 2014 Ferrari Group Prediction 7: Increased Dimensions and Occurrence of Supply Chain Risk or Major Disruption Further Impact Global Sourcing Strategies

Why is supply chain risk management so important year after year? Let’s look at a few risk mitigation statistics to get a sense of the drivers.

  • 85% of global organizations reported supply chain disruptions in 2012 alone. 
  • The prevalence of natural disasters is growing, up 200% from 1992 to 2012.
  • The cost of the disruptions increased tenfold from the 1960s to the mid-2000’s.
  • 80% of companies worldwide see supply chain protection as a priority.

These numbers are hard to ignore, and are indicative of why management of risk has been a top supply chain recommendation for consecutive years: consequences!  In addition to a disruption’s immediate consequences of productivity and revenues, long-term consequences include decreased stock value, loss of customer loyalty, and threats to company survival. Though supply chain risk management is not new, it is a growing priority with the growing number of global supply chains.

Examples of supply chain disruptions come in many forms, all equally threatening:

  • Real-world natural disaster disruptions stick with us. Think of the images conjured up by just two-word phrases: Thailand floods, Japan quake, Horsemeat scandal. 
  • Vulnerabilities to non-disaster, external impacts such as cyber fraud, political unrest, and supplier failures can also be devastating, and bad press in the age of information exacerbates the problems.
  • Internal impacts such as supply chain bottlenecks, inadequate demand forecasting, and production failures can cause bullwhip effects across an organization, and get worse the longer they are not corrected.

An example of a client of ours shows the positive impact that demand forecasting software can make to address a major disruption. Responses enabled by technology can be lifesavers, as one of our clients, Imperial Sugar, found out when a fire destroyed 60% of their plant capacity. Our ‘availability to promise’ was key functionality that allowed leadership to use their heads in addition to their hearts in the wake of the disaster. With no stockpile of inventory, the software allowed everyone from sales to production to see what was on order, and what could be delivered.

What’s the Solution?

Businesswomen Balancing Over MoneyProblems cannot be sidestepped altogether, but recovery difficulties, even those with ripple effects throughout organizations, can be lessened with resilience programs. Deloitte defines the foundations of a resilient supply chain as visibility to the supply chain, flexibility to respond to problems, close collaboration with suppliers and customers, and control processes in place to ensure procedures are followed to monitor and improve resilience measures. Easier said than done!

Beyond the building of this foundation is the fact that risk management does not live in a bubble, but rather, alongside opposing forces that can also be important organization initiatives. For example, global economic conditions have spurred corporate initiatives which, while saving costs, can counteract resilience efforts. These include supplier consolidation, outsourcing of functions, and globalization of supply chains. But with the integration of the risk management function and strategic business planning function, a good balance can be struck to realize both efforts. Blind focus on cost-cutting measures can mean that an organization misses out on keeping the competitive edge provided with risk management.

In the end, resilience measures are imperative, either smaller measures like identifying and quantifying the risks, or larger measures like modeling of scenarios of events, making detailed responses of plans, and carrying out exercises to ensure that risks are controlled. Even more importantly, as for any high priority task, effective leaders should tap a responsible individual, assign measureable metrics, and evaluate those regularly for continual improvement. In this case, the company’s survival depends on it!

Recommendations for Supply Chain Risk Management

Supply chain recommendations: don't roll the dice, manage your riskBased on what we saw with our clients and the industry trends and events this year, here are my recommendations for mitigating supply chain risk:

  1. Identify all risks, including disasters, economic, human resources, customer demand, and never overlook: your competitors! 
  2. Build, evaluate, or enhance your supply chain foundations of visibility, problem response flexibility, close collaboration with suppliers, control processes, and first-rate customer demand planning to ensure effective resilience measures.
  3. Mix resilience planning and business planning functions. Communication between stakeholders is a cornerstone, and is the glue that keeps the wheels turning during a crisis.
  4. Large or small, do what you can on the spectrum from identifying your risks to planning responses to practicing scenarios of those risks occurring. Choose a director to lead and track the progress metrics.

Going back to the example of Imperial Sugar’s production facility fires and the ensuing recovery, demand forecasting was the risk management key in the wake of a disaster that allowed them to preserve customer loyalty. This leads to my third and final supply chain recommendation blog:  to make the supply chain revolve around a customer focus, which in Imperial’s case, was central to their recovery.  I’ve saved the best recommendation for last, so don’t miss my advice next time!

What were the risks you experienced last year? Were they the ones you expected?

“Supply Chain Resilience 2011,” November 2011, Business Continuity Institute.

Do You Minimize Supply Chain Risk With Demand Forecasting?

Supply chain management, like life, is a game of preparation for, protection against, and recovery from risk…

Risk is everywhere.  Our reactions to it, however, are what separate the good, the bad, and the ugly, and can align the future playing field.  In other words, it’s how proactive you are in risk aversion and even on capitalizing on risk, that defines your company.  Deloitte’s recent report:  “The ripple effect:  How manufacturers and retail executives view the growing challenge of supply chain risk” can give insight to how your company lines up.  The report showed results of a survey taken by 600 executives at large and small businesses alike regarding their supply chain risk concerns, along with some words of advice from Deloitte.

One interesting result was the opinions of the most costly outcomes of the supply chain risk.  The top two most costly outcomes were said to be margin erosion and physical product flow disruption.  Talk about risk!  According to the report, “Executives considered margin erosion to be more costly than other types of supply chain risk events, with 54 percent of respondents citing it as one of their top two issues. This may be because margin erosion is a relatively high-profile, easy-to-measure problem, and executives are thus well aware of it.  ” It’s even personal, since it often affects their own compensation.

Compounding the bottom line impacts of supply chain risks are the growth of risk events themselves.  “Such disruptions are not only more frequent, they are also having a larger impact. Fifty three percent of executives said that these events have become more costly over the last three years, including 13 percent who said they had become much more costly. Studies have found that natural disasters are occurring more frequently, and the economic impact of each event is usually greater than before. For example, five of the 10 most expensive natural disasters have taken place just within the past four years.”

With all of the above cited concerns, let’s go back to the matter of proactive risk aversion and whether or not the concerns are a call to action for these executives. 71% of the executives claim that supply chain risk is an important factor in their companies’ strategic decision making, and 63% say that their company has a risk management program focused specifically on the supply chain.  But there are obstacles, and there seems to be a gap between concern and action.  A tool that Deloitte says may help avert supply chain risks is predictive modeling. A surprising survey result is that only 36% of the executives use this technology. By investing in this and other technology, companies go beyond traditional understanding of risk to building resiliency against risk, and safeguarding against the dangers of margin erosion and physical product flow disruption.  The bottom line.

Our clients have recognized the importance of technology to identify, address, and manage their risks across their value chains.  They need to bring causal factors in to the forecast to reflect macroenvironmental pressures on the supply chain.  They want to minimize their investment by having a tool that can be designed to their processes, not vice versa.  They are interested in a best-of-breed tool that  provides the best demand forecasting available to minimize their risk.

As pointed out in our video, in life, if you know there are risks, you avoid them.  Why wouldn’t you do the same in your business?